An Equitable Assessment of Rights and Wrongs

by Dr Michael Nassim

11.  Loss and Damage suffered by Individual Clients and Members

11.  Loss and Damage suffered by Individual Clients and Members

Having set out the evidence, we may now addresses the losses and damage that members will have sustained if they left before the Compromise proposals, or declined the Compromise proposals and resigned from the Society.  Those who left earlier on may have suffered less, depending upon when and how they quit. The various categories that may be applicable may also vary according to individual circumstances, but comprise:

1.       An immediate loss of 16% of their principal, ostensibly to cover the aforementioned deficit, as exemplified by the Compromise offer.

2.       A further Market Value Adjuster, which varied between 10 & 20% at different times.

3.       An additional but nebulous penalty for unscheduled withdrawal if return of principal had to be requested other than on a policy anniversary (if withdrawal was made before the 5^th anniversary of the policy).

4.       Loss of mutuality and low expense ratio benefit, which combination was not available elsewhere (i.e. equivalent to approximately 3.5% of the principal in most instances)

5.       Loss of benefits due to, and the ultimately fatal risk incurred by, earlier disappearance of the Society’s estate.

6.       Re-investment expenses (typically 5% for a managed product, plus intermediary commission if not waived).

7.       Unnecessary worry, time, effort and incidental expenditure.

8.       Legal costs (minimum typically taken to be Solicitors or Counsels advice, Small Claims or County Court Judgement application).

9.       Loss of interest from vanished principal and benefits, plus that from monies spent on re-investment and legal expenses.

10.   Damages whether civil or criminal, aggravated or not.

11.   Harm resulting from the failure of the Treasury and regulator to monitor, advise, protect or otherwise act before, on the eve of, and after the Compromise.

It may sometimes be necessary for policyholders to lump items 1-4 together in order to see what their order of magnitude is, because it is impossible to estimate 3 directly.  Consensus on item 10 is still awaited, but the Society is seeking full reparation and legal costs on its own behalf, even before the issue of damage has been considered.    How much beyond this should ex-members claim? We have previously seen that, although the Society is accountable for what has been done in its name, it does not necessarily also acquire the stigma of guilt.  If so, ex-members should hesitate before claiming exemplary, retributive or punitive damages because it would be unhelpful, and inappropriately hurtful to continuing and innocent members.  On the other hand the ex-members are much in the minority, and in many cases they have valued the wish for justice above hopes of personal certainty, whereas the converse may apply to those who voted for the Compromise.  In weighing all this we have also to reconsider that since the misdemeanours go back to 1989 at the latest, many more people may have legitimate grievances than previously thought.

Those who accepted the Compromise or were forced into it by disenfranchisement have different categories of loss, namely:

1.       Forfeiture of legal rights against the Society and its old and new Boards.

2.       Loss of With Profits status of their fund, as a result of:

3.       Loss of the Society’s estate.

4.       Excessive and inequitable mutual insurance, partly caused by unequal guarantees or the hidden penalties thereof; not yet fully resolved.

5.       Potential liability for litigation from ex-members (the likely extent of which may have been underplayed).

6.       Harm arising from governmental and regulatory deficiencies as in point 11 above.

In essence, therefore, the same duties of information apply to the Compromise as to any other financial product.  Accepters may therefore have a case for avoidable losses and damages should it emerge that they were in effect duped into the Compromise.  Hence any conditional amnesty may not apply to the new management of the Society, and most particularly should it have promoted the Compromise by using reason or premise that it knew or suspected might be untrue. In this regard four factors are of additional concern, namely:

1)      An optimistically low Compromise estimate of the size of the deficit.

2)      Holding that mis-selling was not of a generic character, such that future litigation would be piecemeal and trivial.

3)      Using and upholding the previous Board’s discredited business and insurance paradigm, conventions and practices without substantial modification, to the actual or potential detriment of members past and present. 

Item 3 is of particular relevance because of the continuing usefulness of First Order Sophistry Item 7, which now allows With-Profits Policies to be cut to the bone because the guaranteed element is so small.  The guaranteed element will reduce yet further under Second Order Sophistry Item 6, which has given rise to the related GIR issue. There is also the question of disenfranchisement of With-Profits annuitants and the consequent burdens laid upon their Trustees, who are now answerable for them.   In the case of FSAVC annuitants the Society is both fund executor and Trustee, but Law Debenture Pension Trust Corporation was deputised to vote on the Compromise Scheme arrangement on their behalf to avoid a conflict of interests.  The Legal Services Department of the Equitable has confirmed to the writer that Law Debenture received the same data, i.e. the Scheme Circular, as individual members, and returned its ballot form in the assent without reasoned response or comment.  If this does not inspire other classes of annuitants with confidence, they may wish to contact the Legal Services Department and their own Trustees for explanations of their conduct.  

Another interesting anomaly arose because of the government’s FSAVC review, which was not completed until autumn 2002, i.e. well after the Compromise.  If the Society had cut annuities immediately after the Compromise became effective, FSAVC asset shares would subsequently have been restored by the FSAVC review. Hence the Society had to wait until November 2002 in order to be sure of cutting all the upwardly revised FSAVC fund values and annuities permanently back to suitable size along with all the others.  In effect, therefore, the Society made upward revisions to FSAVCs after the Compromise which it had no intention of honouring. (Sir Howard Davies’ office and the FSA were made witness to the possibility of this happening before it did, and also to the fact that the writer reserved a position on behalf of all FSAVC annuitants in this matter.  This is now part of Financial Ombudsman Service complaint no. 3936405)